When OECD launched the Base Erosion and Profit Shifting (BEPS) project, particularly when the 15 final reports were published in 2015, multinationals, taxpayers, tax authorities, and tax advisors around the world found themselves in a frenzy, trying to fully understand the implications and impact of BEPS – and reimagining how BEPS related issues and perspectives would become the new norm.
That was BEPS 1.0.
Just as multinationals reel from BEPS 1.0, we welcome BEPS 2.0 – which has arisen from the discussions leading from the 2015 BEPS discussions, particularly on Action 1 which recognized that digitalization and the business models it brings, present challenges for international taxation worthwhile diving into. BEPS 2.0 has hence resulted in a series of questions on taxing rights and how income should be allocated among countries.
In recent discussions, I have found that multinationals in more traditional industries such as pharmaceuticals, chemicals, logistics, among others, largely consider the discussions around digitalization to be relevant only to the likes of Facebook, Amazon, and Alibaba. However, based on the ongoing discussions around addressing the challenges of the digitalization of the economy, it is clear that OECD’s proposals around this will not impact only digital businesses. The focus on value creation, addressing marketing intangibles, and considering significant economic presence, are aspects that will need to be reviewed by all multinationals in their transfer pricing models.
Consider limited risk distributor (“LRD”) and service fee models for local sales and marketing activities. The “marketing intangibles” proposal set out by the OECD in the public consultation paper in February 2019 clearly sets out that a multinational group can “reach into” a jurisdiction, remotely or through limited local presence (through an LRD or a service provider) to develop local marketing intangibles such as customer bases, brand name, customer relationships. This concept bridges marketing intangibles with the market jurisdiction, and considers a potential need to accord a part of the non-routine income to the market jurisdiction – which under existing transfer pricing principles, are typically accorded to the entrepreneurial, risk-taking principal, instead of the local LRDs or service providers. This proposal, alongside the other two proposals covering “user participation” and “significant economic presence”, are expected to go beyond the arm’s length principle – at the same time changing the current tax nexus rules which are currently limited to businesses having a physical presence in a jurisdiction.
OECD’s work on these proposals on BEPS 2.0 are underway, and expected to continue through 2020, where consensus is expected towards the end of 2020. It is important that multinationals start considering the potential impact and what BEPS 2.0 means to them, and identify areas in their transfer pricing models that might need to be reassessed.
Through efforts of the KPMG International network, a tool that will allow multinationals to assess the potential impact of the BEPS 2.0 initiative, will be released. Watch this space!